Both Donato Sferra and Mark Attanasio have extensive backgrounds in the worlds of accounting, investment banking, and capital markets. But the full range of their knowledge and experience finds expression in the Toronto-based merchant bank they co-founded, Hillcrest Merchant Partners. These days, the managing partners invest in companies, both within the tech industry and outside of it, that are in the “seed to growth” (less than $15 million) stage of development. They specialize in cannabis, electric metals, mining, and gaming, but also in technology companies that span sectors like fintech (e.g. blockchain), communications infrastructure, Life science research tools, wireless and more.
The partners shared their views recently on what it takes for businesses to be competitive in the technical space and the challenges of the business leaders who lead these companies.
1. Technology, in general, seems to advance so quickly. It’s been said that computers double their capabilities every 12 to 18 months—along with the information technologies that make use of them. Do the types of tech companies you invest in have less time (and more pressure) to prove themselves than other types of industries?
Donato Sferra: What we should talk about when we look at tech companies, due to the trend of how fast computers double their capabilities and how fast that technology is changing and advancing, is we look for companies that create solutions to difficult problems or applications to large, addressable markets . Those solutions typically come with long term patents, keep competitive advantages, are long term and sustainable with comparative, competitive advantages that other companies may not have. So, I think you’re talking about computing power and doubling that power, but those are the types of companies we would stay away from. Those are not companies that are solving real problems. We have no real interest in looking to invest in companies that are creating products that are me-too products trying to compete with other hardware providers that are creating me-too type products. We are looking for products that are creating real solutions to real problems, solving difficult problems in a tech space.
2. Given the competitive nature of the technology industry, your criteria for investing in technology companies must also be pretty tough. Do people pitch you more ideas than you discover yourself, and are they prepared for the criteria they must meet? You must understand the tech landscape pretty well, and have an idea where it’s going, in order to choose a winner.
Donato Sferra: We are always looking at companies. We are constantly being pitched tech companies. Tech is a space that we make a little investment in. The tech space in Canada is smaller than places like the U.S. or Israel and other countries. A couple of key things that we look at are the quality of management and what problem that company is trying to solve. Is it a real problem? is it easy to duplicate their solution? Those types of companies are very difficult to find – not only in Canada, but I think because we primarily operate with tech investments within Canada, I think we’ve only made 3 tech investments in the past 18 months.
3. Blockchain technology is not well understood by the average person. Could you explain what you see as the potential applications beyond crypto currency? And what challenges need to be addressed before that potential can be fulfilled?
Mark Attanasio: I think cryptocurrency and blockchain technology is not well understood because it’s a newly-emerging technology. One of the reasons for that is that regulations have not caught up to the blockchain evolution. I think for blockchain to become more mainstream, it’s going to require a lot more regulatory adoption from the financial regulators in different countries.
I think in terms of application, blockchain can be very easily applied to areas such as banking – storing digital assets and transacting around the world in terms of wire transfers which can be done very quickly, arguably more secure using distributed ledger, and much more cost effectively than traditional methods. In the legal world, executing contracts on a blockchain is much more secure than traditional routes and removes any risk of tampering or manipulation. Those are the two most obvious applications that I see. In addition, the insurance sector can start to use the blockchain to transact with their policies, specifically life insurance policies Or Estate Wills due to the removal of relying on individuals to execute. Rather, the blockchain uses a distributed ledger to facilitate the transaction.
Donato Sferra: Just generally, smart contracts are the overriding thing. That area is what we see as an interesting area as it relates to various blockchain solutions. The other area that Mark hit is online gaming. Any industry where you can remove the middle man because of the verification capabilities of the blockchain, the ability to store and verify without a middle person, creating that trust between two unknown parties, that’s really the solution. And so, that applies to a number industries, but there are many more applications that can be applied to banking, healthcare, logistics, etc. We see the blockchain as more important a solution than cryptocurrencies and sales.
4. Do you think that Canada stands to be on the leading edge of blockchain currency, given that the TSE has allowed trading of crypto-currency ETFs while the SEC in the US has so far rejected all proposals, and the European Union seems wary of it as well? How far off do you think is a cashless society in North America?
Donato Sferra: We see that regulations in crypto and in blockchain is needed and we welcome it. We think that the regulation will basically be governments around the world recognizing the value of blockchain and crypto. We’re not really making a bet as to which crypto is going to win or lose, that’s not what we’re looking at. But regulation is definitely something that happened with the internet. People were wary about using the internet and transacting on the internet back in the early and mid 90s. It wasn’t until the internet became regulated and there was form of governance and government making sure that consumers were protected and people transacting on the internet were protected that the internet really took off. It was really a confidence game. And we look at what happened this weekend, Alibaba had the biggest one day transaction, 23 billion dollars in transactions in one day. Amazon is taking over the world everyday. It would be the same thing in blockchain where government is looking at regulations in blockchain and crypto and I think when that happens, it’s the implicit approval at that point. It’s saying that this is real, it’s legitimate and we’re going to govern it. And also, it instills a lot of confidence to people around the world to start using crypto and to start using the blockchain on a much wider basis.
5. Do you think technology and digital change should play a role in a business school education, given that the rapid rate of technological and digital advance would seem to be a huge challenge for companies? And what do you think it takes to be an effective business leader in the face of this rapidly changing environment?
Mark Attanasio: Yes, technology should play a role in education from high school all the way to business school, given how technology interacts with all aspects of life nowadays. For example, technology is now used for school assignments, learning tools via online applications, day to day banking, and general social interactions. It is very hard to enter the global workforce today and not have a sound understanding of technology. Given globalization, using technology has become virtually mandatory from cloud-based storage, to cyber security being a very important challenge for companies.
An effective leader in this changing environment is one that accepts and embraces technological change. By this I mean, a leader needs to understand that technology is not something that can be treated as an option for business. Technology has to be at the forefront of every leaders’ list of priorities, if he or she wants to have a thriving business in today’s world.